RISK VS REWARD FOR RETIREMENT INVESTORS

Anyone who invests in financial products is forced to wrestle with the balance between risk and reward. Most people understand this, but nobody ever spells out exactly what it means for you in dollars and cents. My goal is to do that for you today.

Stocks offer the potential for large gains. For example, investors who bought Nvidia just two years ago have seen their shares rise nearly 300%.

However, stocks can also experience periods of severe losses. During the dot-com crash in the early 2000s, technology stocks lost more than 75% of their value.

Bonds, on the other hand, typically offer lower returns with lower risk. Over the long run, bonds tend to produce annual returns of 3% to 4%. While bonds can lose money in the short term, their declines are generally smaller than those seen in stocks.

Individual investors have always faced this tradeoff between risk and reward. For retirees or those nearing retirement, the stakes are even higher. Large losses in your 60s or 70s can devastate your retirement plans.

Since most investors have realized that buying individual stocks rarely works out, the focus has shifted to balancing risk and reward through mutual funds or ETFs. Investment professionals typically guide clients toward a mix of stock funds and bond funds.

But the range of available options—and the potential outcomes—remains limited. Here’s how the typical choices break down:

Investor Type	Stock/Bond Mix	Avg. Annual Return
Zero-Risk Investor	0% / 100%	3.0%
Low-Risk Investor	30% / 70%	4.8%
Moderate-Risk Investor	50% / 50%	6.0%

Higher-risk portfolios (e.g., 70% stocks) can increase returns, but most retirement investors avoid them because the potential for large losses is simply too great. Let’s now look at the downside risk for these typical investment choices.

Investor Type	Stock/Bond Mix	Avg. Annual Return	Typical Losses
Zero-Risk Investor	0% / 100%	3.0%	0%
Low-Risk Investor	30% / 70%	4.8%	-12%
Moderate-Risk Investor	50% / 50%	6.0%	-20%

This table highlights why many retirement investors are frustrated. The no-risk option doesn’t keep up with inflation. The moderate-risk portfolio delivers only modest returns of about 6% annually, while still exposing investors to potential 20% losses during bear markets.

As a result, most people settle for the low-risk option—earning roughly 4.8% per year with more manageable drawdowns of around -12%.

The problem is that earning only 5% annually often leads to a tight retirement budget.

To illustrate this in real terms, consider a 60-year-old retirement investor with a $500,000 portfolio who continues working and contributing until age 65.

A typical low-risk investor could expect to generate about $45,000 per year in retirement income from their 401(k).

If they tried to chase higher returns by increasing their stock exposure, they could face losses exceeding $100,000 in a bear market.

I’ve always felt these options—and their associated risks—are terrible for retirement investors. Frankly, I think the investment services industry is one of the worst industries in the world. Is this really the best they can do?

I wasn’t willing to accept these poor choices. Over several decades of research, testing, and refinement, I developed a smarter investing system—one that delivers the same risk level as the low-risk option (around 12% potential short-term loss), but with much higher returns of 13% to 15% per year.

Here’s how that changes things for our retirement investor example:

Low Risk Investor vs. My System

	Low Risk Investor	My System
Account Balance at Age 60	$500,000	$500,000
Stocks/Bond Mix	30% / 70%	90% / 10%
Annual Return %	4.8%	14%
Annual Retirement Income	$44,900	$124,900
Total Retirement Income	$1.3 million	$3.7 million
Potential Loss %	-12%	-12%
Potential Loss $	-$60,000	-$60,000

For the same nominal risk (short-term loss of -12%), this investor could enjoy $80,000 more per year in retirement income—78% higher—which translates to an additional $2.4 million over a 29-year retirement.

To learn more about how my Market Cycles system works, Click here.

Stay Disciplined My Friends,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.